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Thursday, December 15, 2011

On David Stern And Bad Influences

An obscenely intelligent and forward-thinking man, there was a time when David Stern was, above all else, the one of the greatest commissioners in professional sports. These days, however, that title seems a distant memory, with his role as CEO of a multi-billion dollar corporation trumping all that pertains to the actual game he oversees. He no longer chooses to consort with longtime, team-first owners, the Jerry Busses and Jerry Reinsdorfs of the world, preferring instead to align himself with captains of industry, hedge fund managers, venture capitalists, buyout king, and whatever Robert Sarver is- individuals well-versed not only in the science of running large enterprisesat a profit, but also the art of finding new and creative ways to squeeze cash out of them.

With the most successful of front offices traditionally keeping closer tabs on standings than income statements, NBA teams have not historically been paragons of financial efficiency. However, despite presenting challenges for those in search of consistent profitability, team ownership has long been seen as an avenue to massive long-term financial gain and apparently- as we learned in the months preceding and encompassing the lockout- a means to further other ventures and a safe haven for technically-legal financial chicanery.

As has been the case with countless inefficient markets comprised of valuable assets, the NBA is now a playground for financial engineers. What’s resulted is fascinating, if simultaneously infuriating. Always seen as the most stage-managed of the sports’ insular old boys clubs, the NBA is now a near-perfect microcosm of the world's corrupt oligopolies. There is the appearance of a general rule of law, and economic and human rights rules are followed sufficiently to justify continued relations, but, from the manner in which the Seattle Supersonics became the Oklahoma City Thunder, to disputed claims of financial distress that led to, and prolonged the lockout, to the inexplicable veto of an agreed-upon trade of Chris Paul to the Lakers, it's clear that business-as-usual is pretty shady.

David, these people are not your real friends.

Hopefully enough of these increasingly public moments of scorn and shame, and, more importantly to individuals unaccustomed to prying eyes examining the means by which they accumulate their immense wealth, the realization that nothing truly happens behind closed doors anymore will affect some change.

Most importantly, however, the NBA’s ultimate saving grace, if there is to be one, from the cold world of the mercenary financier, will be, ironically, the financial ruin of some of its teams. Barring the unforeseen, the mirage of an NBA team as a market-beating investment will soon begin to fade. It’s tough to envision an environment in which NBA franchises will justify their recent sale prices, let alone continue to appreciate at a better-than-market rate. Consider for a moment the figures associated with the July 2010 sale of the Golden State Warriors:

Bought by Chris Cohan in January 1995 for $119 million, the Warriors- and their monopoly on Bay Area NBA hoops- were sold to Joe Lacob, a managing partner at Kleiner Perkins (early investors in Google, plus 150+ companies that have gone public), and Peter Guber, chairman of Mandalay Entertainment, in July 2010 for a record sum of $450 million. Pretty good, right? Well…

Yes, Cohan did nearly quadruple his investment in just over a decade and a half, but his money compounded at just 8.67%, or roughly .75% more than the risk-free return on a 30-year U.S. Treasury bond purchased at the start of 1995. Should the value of the team (ignoring the probability that it has already dipped below purchase price) continue to compound at the same rate for the next 10 years as it did for the aforementioned 16, Lacob and Gruber would be able to unload the Warriors for $1.03 billion.

Let’s be real. I don’t care how great the fan base is, nothing less than hyperinflation makes the Warriors a billion-dollar business within a decade. Do these guys seriously believe that within a decade, the Warriors, the one playoff appearance and more wins than only the Clippers in 17 years Golden State freaking Warriors are going to be worth over a billion dollars?

As I have pointed out in the past, such returns simply will not fly in the world of illiquid investments- in which the return demanded by investors seldom dips below 20%, and commonly approaches 30%. Additionally, the strong-arm tactics likely to be employed by owners whose teeth were cut in the brutal world of private equity will alienate customers in an emotional, fan-driven business, causing returns to dwindle further.

If this scenario plays out, it’s a safe bet that the value of non-marquee teams will drop, triggering if not panic sales, at least second thoughts from these top-of-market buyers. As with any market, asking prices will need to fall to the point of equilibrium or (and?) the number (supply) of teams must fall to the point where scarcity justifies purchase price (demand), driving buyers that targeted teams strictly as investment vehicles from the market, in search of greener pastures.

And it will be for the best.

Because, in the midst of this rambling mess, I came to a sad realization- back in the day, I think this Stern would have told Red Auerbach to fuck off.